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Nominal exchange rate flexibility and real exchange rate adjustment: New evidence from dual exchange rates in developing countries

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Author Info
Cheung, Yin-Wong
Lai, Kon S.

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Abstract

This study investigates whether greater nominal exchange rate flexibility aids real exchange rate adjustment based on data from dual exchange rates in developing countries. Specifically, we analyze whether the more flexible parallel market rate produces faster real exchange rate adjustment than the less flexible official rate does. Half-life estimates of adjustment speeds are obtained from fractional time series analysis. We find no systematic evidence that greater exchange rate flexibility tends to produce either faster or slower real exchange rate adjustment, albeit there is substantial cross-country heterogeneity in speed estimates. With official rates pegged to the dollar, many developing countries use parallel exchange markets as a back-door channel to facilitate real exchange rate adjustment. The evidence suggests, however, that these parallel markets often fail to speed up real rate adjustment.

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File URL: http://www.sciencedirect.com/science/article/B6VF1-4MTK96F-1/1/98c3ab0a520268c22127b1162fa2f25b
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Publisher Info
Article provided by Elsevier in its journal Japan and the World Economy.

Volume (Year): 20 (2008)
Issue (Month): 3 (August)
Pages: 415-434
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Handle: RePEc:eee:japwor:v:20:y:2008:i:3:p:415-434

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Web page: http://www.elsevier.com/locate/inca/505557

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  4. Balvers, Ronald J. & Bergstrand, Jeffrey H., 2002. "Government expenditure and equilibrium real exchange rates," Journal of International Money and Finance, Elsevier, vol. 21(5), pages 667-692, October. [Downloadable!] (restricted)
  5. Cheung, Yin-Wong & Lai, Kon S., 2001. "Long memory and nonlinear mean reversion in Japanese yen-based real exchange rates," Journal of International Money and Finance, Elsevier, vol. 20(1), pages 115-132, February. [Downloadable!] (restricted)
  6. Phylaktis, Kate, 1991. "The black market for dollars in Chile," Journal of Development Economics, Elsevier, vol. 37(1-2), pages 155-172, November. [Downloadable!] (restricted)
  7. Alesina, Alberto & Perotti, Roberto, 1995. "Taxation and redistribution in an open economy," European Economic Review, Elsevier, vol. 39(5), pages 961-979, May. [Downloadable!] (restricted)
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  10. Tamim Bayoumi and Barry Eichengreen., 1992. "Macroeconomic Adjustment Under Bretton Woods and the Post-Bretton-Woods Float: An Impulse- Response Analysis," Economics Working Papers 92-201, University of California at Berkeley. [Downloadable!]
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  11. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June. [Downloadable!] (restricted)
  12. Diamandis, Panayiotis F., 2003. "Market efficiency, purchasing power parity, and the official and parallel markets for foreign currency in Latin America," International Review of Economics & Finance, Elsevier, vol. 12(1), pages 89-110. [Downloadable!] (restricted)
  13. Cheung, Yin-Wong & Diebold, Francis X., 1994. "On maximum likelihood estimation of the differencing parameter of fractionally-integrated noise with unknown mean," Journal of Econometrics, Elsevier, vol. 62(2), pages 301-316, June. [Downloadable!] (restricted)
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  16. Canzoneri, Matthew B. & Cumby, Robert E. & Diba, Behzad, 1999. "Relative labor productivity and the real exchange rate in the long run: evidence for a panel of OECD countries," Journal of International Economics, Elsevier, vol. 47(2), pages 245-266, April. [Downloadable!] (restricted)
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  17. Pozo, Susan & Wheeler, Mark, 1999. "Expectations and the Black Market Premium," Review of International Economics, Blackwell Publishing, vol. 7(2), pages 245-53, May.
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  19. Murray, Christian J. & Papell, David H., 2002. "The purchasing power parity persistence paradigm," Journal of International Economics, Elsevier, vol. 56(1), pages 1-19, January. [Downloadable!] (restricted)
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  20. Kouretas, Georgios P & Zarangas, Leonidas P, 1998. "A Cointegration Analysis of the Official and Parallel Foreign Exchange Markets for Dollars in Greece," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 3(3), pages 261-76, July. [Downloadable!] (restricted)
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  21. Benigno, Gianluca, 2004. "Real exchange rate persistence and monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 473-502, April. [Downloadable!] (restricted)
  22. Cheung, Yin-Wong & Lai, Kon S, 1993. "A Fractional Cointegration Analysis of Purchasing Power Parity," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(1), pages 103-12, January.
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